Company sale pitfalls: Failing to plan for an exit

July 2022

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This is part of a series of Guides dealing with some of the common pitfalls business owners can face when looking to sell their company.

One of the common pitfalls is failing to plan for an exit.

Many business owners fail through lack of planning or focus to get anything like the value they could obtain for their business. Or even worse, they fail to sell it at all and have to wind it down (and up) on retirement.

Try not to fall into some of the traps I have often seen owner managers fall into, such as:

• Not planning for your retirement, and ending up having to retire without being able to find any buyer for your business. Instead, you may have to close it down, or at best pass the ownership on to employees for a knock-down price paid over time.
• Having to work on way past planned retirement age to try belatedly to build the business up for sale and find a buyer.
• Leaving the business so dependent on you that it has less value to a buyer.
• Not taking key steps to build up and protect your business value and make it attractive to potential buyers.
• Not putting in place a planned and managed process to market your company for sale, and therefore failing to find the best possible buyer and the best possible price.
• Ending up in a weak negotiating position because the buyer you have found knows you have few other options.
• Not managing your relationships with other shareholders in your company to ensure that you share exit objectives, or that you can at least force them to sell at the same time as you.

Exit planning tips

If you are a business owner here are some things worth thinking about

Have clear exit objectives

The clearer your objectives the easier it will be to make plans to help you realise them. (And if you are clear that your objectives are unclear then you can plan around that as well!)

If your objective is to sell your business, the reasons for selling will have a key influence on how you plan things. So, what are you building your business for?

• Do you think of it as building up your business with a view to creating value which you can one day sell?
• Do you see this as part of your retirement and succession planning? Or to fund a pre-retirement change in lifestyle? Do you see your business as your pension?
• Or are you more an entrepreneur than a manager? Do you have plans to build your business to a particular stage where you can sell it, perhaps helping to fund you to move on to try other business ventures? Perhaps you have even targeted a potential buyer for some time?
• Or do you have more flexible plans to build a business with a view to taking advantages of opportunities to sell whenever they may arise, even if this is before you planned to retire?
• Or are you not really thinking so much in terms of building your business with an end exit in mind? Is it more a lifestyle business which generates hopefully good income for you but which you haven’t really given much thought to selling?
• Or do you have other plans? For example, you may plan to keep your business in the family (if they want it). Or you may simply have a clear plan to retire one day and close your business down.

Have a clear exit plan

What do you need to do to get in a position to sell?

• The sooner you start planning the better. Ideally several years before you hope to sell.
• Tidy up your company. Make it look clean and well-run in all respects to anyone looking. Tidy books and paperwork. Something a buyer would feel comfortable taking over.
• Remove or deal with skeletons. Things that would definitely put off a buyer. Examples might include that long unresolved litigation, or that tax planning scheme which the Revenue have challenged….
• Take steps to build up and protect your business value and make it attractive to potential buyers. Examples include putting in place a motivated management team; putting in place a solid business model (with good long-term contracts to underwrite the value of the business); and protecting your IPR.
• Get a few years decent sets of accounts behind you, which back up the story you want to tell.
• Make yourself less important. How dependant is the business on your involvement? Any buyer needs to be able to take over and run things without your help. Have you got a strong management team a buyer can happily work with?
• Be prepared to have to carry on a bit longer. Occasionally you might be asked to provide transitional help, for example through an ongoing consultancy agreement. Sometimes the only or best type of deal available to you may involve performance-based deferred payments – an earn-out. Are you willing to spend another year or two in the business working for someone else to earn your earn-out? The less it is about you the more you can avoid this.
• Get all shareholders on board. All sorts of problems can arise if different shareholders have conflicting retirement or exit plans. For example I have seen many cases where founder owners of a company have given minority shareholdings away to employees or others without putting in place arrangements to protect their interests (such as drag-along provisions in the company’s Articles of Association, or in a shareholders agreement, requiring all shareholders to agree to sell on the same terms if the founder owner ever wants to sell).

Have a planned and managed process to market your company for sale.

In my next Guide I will share some tips on how to market your company for sale.

 

 

If you would like to discuss any of the issues raised in this Guide or any other issues relating to the possible sale of your business please email me at andrew.james@onhandcounsel to arrange a complimentary consultation to help you to identify what might be involved and how I can help.

 

About the author:

I have been a specialist corporate lawyer for 35 years. I have the ‘City quality’ experience and expertise to deal with any deal. But I also offer a level of personal service and value of money that you would struggle to get from most corporate law firms.

For more , see https://www.onhandcounsel.co.uk/benefits/value-for-money/

My business model and approach are therefore particularly suitable for most deals of any range from £250k to £10m.